Financing Equitable Development

报告摘要：As a sector, real estate has helped drive wealth generation, but has also played a role in creating the racial wealth gap in the United States—a persistent gap that has cost the U.S. economy $16 trillion over the past 20 years.

Investing in equitable development can help build a more prosperous future for all, while potentially helping to repair past harm.

This paper focuses on a key challenge for equitable development, and development undertaken by BIPOC (Black, Indigenous, People of Color) developers: access to capital. The paper outlines key financing sources and approaches, discussing both their potential and key barriers and challenges for leveraging them more widely for equitable development projects.

Types of Equitable Development

In this discussion paper, equitable development is defined as

Real estate development that provides community wealth-building opportunities, uses meaningful community engagement strategies, prioritizes equitable benefits such as affordable housing or commercial space for BIPOC owners, and/or promotes inclusive development

In practice, many types of projects and investments might qualify as equitable development projects. These projects include but are not limited to the following:

• Affordable housing projects
• Attainable or market rate housing projects, especially those in underinvested neighborhoods
• Missing middle housing that helps densify neighborhoods
• Neighborhood-serving retail or commercial projects, especially those that provide space for BIPOC businesses or offer leases on concessionary terms

For maximum positive impact, individual development projects should be part of a broader equitable revitalization vision, strategy, and process. This strategy could be coordinated by any number of organizations, including anchor institutions, government agencies, or nonprofit groups.

Equitable Finance: Sources and Approaches

Investment in equitable development can be a powerful way to transform communities and build wealth, but it is seen by many as a “riskier” endeavor. As a result, many traditional capital sources are not readily available for this type of development, or they cost more.

The discussion paper provides an overview of financing sources and approaches that can advance one or more facets of equitable development, and it highlights the potential of each approach and source, the challenges, and key questions investors must address to chart a path forward using these vehicles.

This report provides an overview of the many different sources of capital for equitable development projects. Different financing strategies and mixes may make sense for different deals, understanding that investment decisions have parameters, contexts, and other considerations beyond the basic outlines provided in this paper.

The following financing strategies are reviewed for their potential, challenges and limitations, and key questions:

• Commercial banks – Commercial banks are the largest potential source of capital for equitable development projects. Under the public welfare investment authority and related laws, national banks and federal savings associations can make investments to promote the public welfare. Collectively, banks regulated by the Office of the Comptroller of the Currency annually make more than $10 billion in equity investments in community development activities.
• Community development financial institutions (CDFIs) – CDFIs are specialized lenders that provide a range of financial services in underserved communities. Typically, they are private-sector organizations, and their funds can come from private, public, and philanthropic sources. CDFIs are grounded in the communities they serve, which can help them see development opportunities differently than nonlocal banks. Minority depository institutions (MDIs) – MDIs are banks that serve BIPOC, low- and moderate-income, and rural communities at higher rates than main- stream banks. MDIs offer the opportunity for data collection on BIPOC lending and credit to help dismantle underwriters' perceived versus actual risk of lending to borrowers of color.
• Community equity investment – Several models, including community shareholding, neighborhood-focused real estate investment trusts (REITs), and community investment trusts, provide community members with ownership stakes in development projects.
• Crowdfunding – Crowdfunding enables both accredited and non- accredited investors to invest in projects, typically through online platforms. These investments vary in size and terms and provide equity capital that can be combined with bank-provided debt finance to form the capital stack.
• Federal government – The federal government supports the financing of equitable development through various tax credits and other incentives, grants, and requirements, including Fannie Mae and Freddie Mac, opportunity zones, tax credits, historic preservation, and Community Development Block Grants.
• High-Net-Worth Individuals/family offices – HNWIs and family offices typically aim to grow their corpus and may desire to invest in mission-driven, one-time projects with less potential to be serial investments. They often have a significant amount of capital.
• Impact investing – Impact investing is similar to mission-driven for-profit investing, but the expected social returns are typically on par with the expected financial returns. Developers may receive better terms and be able to use this financing as equity, loss reserve funds, or backstop loans.
• Pension funds – Significant amounts of capital are held by public pensions funds. Pension funds can provide patient capital and other financial products with low volatility, which is particularly appealing to this financing source and necessary for many equitable development projects.
• Philanthropic capital – Philanthropies have up to three main sources of capital that can be used for equitable development: their corpus, development grants and guarantees, and impact investing programs (usually called program-related investments).
• State and local governments – These can include state and local tax credits, property tax abatements, loan guarantees or collateral flexibility, grants using state and local dollars, zoning relief, tax increment financing, leasing, and others.

Additional findings

• Established financing vehicles have the potential to finance equitable development projects if harnessed intentionally for social impact. They face barriers, however, that emerging models – such as community equity investment and crowdfunding – attempt to work around. These newer approaches are innovative, but often they are too recent and uncommon to fully assess, and they have not yet been able to scale.
• Conventional approaches to and underwriting for real estate development are ill-equipped to pivot to embrace equitable development. Instead, there is a need to work toward a financing paradigm that considers a broader return calculus and includes an understanding of community benefits.
• One consistent challenge is scaling up place-based financing tools to invest in places, not just projects. Taking a strategic, holistic approach to residential and commercial development can benefit entire neighborhoods. However, that benefit is not easily reflected in underwriting terms.
• Additional key challenges in scaling equitable development as a field include both growing the pipeline of BIPOC developers and building connections between BIPOC developers and high-net-worth investors and others who can finance a developer’s early projects and provide backing that helps convince financial institutions to provide capital.

Harnessing the potential for economic development

Real estate finance, a potential mechanism for change, is complicated and requires identifying and securing many different capital sources to make a project work. Historically marginalized communities have been cut off from wealth building opportunities for generations, making addressing inequitable access to capital an essential task.